This rating downgrade by three notches pulls down Essar Shipping from `investment grade' (moderate safety) to `speculative grade', implying substantial risk, a Crisil release said.

"The revised rating reflects the stress on Essar Shipping's cash flows following the transfer of shipping terminal project from Essar oil to Essar Shipping and delays in tying up funding for it," the release said, adding that the move led to difficulties for Essar Shipping in servicing its debt obligations despite healthy cash flows in the shipping business.

The revised rating also takes into account sustained fund requirement for the refinery project of Essar Oil and its impact on Essar Shipping, it said. Essar Oil was downgraded to `C' inApril last year.

A "surprised" Essar Shipping has contested the Crisil downgrade and urged the rating agency to reconsider its decision taking into consideration the strengths of the company, in particular the healthy gross profit (Rs 249 crore) and debt coverage ratio for fiscal 1998-99.

A Essar Shipping release said that refinancing of the entire Rs 510-crore shipping debt of the company is expected to be completed within the next few weeks and this will significantly enhance the company's cash flows.

"The company has been regularly servicing its Rs 125-crore debentures for the past six years and this period has also seen a remarkable improvement in Essar Shipping's balance sheet," the release said.

The first principal payment (of Rs 50 crore payable to the public and UTI) falls due in the middle of June and the company has made suitable arrangements for the repayment. The balance Rs 75 crore will be redeemed in the next two years, the release added.

The downgrade comes within days of EssarShipping announcing a net profit of Rs 48.03 crore for 1998-99, a rise of 9 per cent over the previous fiscal. Incidentally, Essar Shipping had also acknowledged the depressed market conditions "which have resulted in a decline of 3 per cent in Essar Shipping's total income", which stood at Rs 434.88 crore.

Essar Shipping has a Rs 1,435-crore port facility under construction at Vadinar for its refinery at Jamnagar. This includes a state-of-the-art Single Buoy Mooring (SBM) terminal, a POL handling terminal, pipelines, and road and rail links. The port has a capacity to handle 20 million tonnes of crude and 14 million tonnes of petro products.

According to a company release, the SBM is under erection and the port is expected to be commissioned by the first half of 2000.